Global economies are constantly in flux and, regardless of whether these changes are positive or negative, overseas developments can have a large impact here in the U.S. Most investors don’t feel the need to monitor macroeconomic factors, but understanding the major aspects at play around the world can help potentially identify risks and as well as possible opportunities.

On that note, our friends over at TD Banks Group’s TD Economics put together an extensive report identifying the themes that they believe will shape the economic narrative in 2018. These were their high-level highlights:

We anticipate the global economy to grow by 3.8%, slightly firmer than the 3.7% pace from last year. Indeed, many of the same themes will act to support global economic activity. Advanced economies will remain fairly hot, with emerging markets gaining speed. Although monetary stimulus should continue to wane, there is no question that conditions will still be highly accommodative by historical standards. Labor markets will tighten further, but a rapid uptick in wage and price pressures is unlikely. In fact, this is a key pillar supporting the view of many analysts that monetary stimulus will be removed at a gradual pace. Any shift in this market perception or actual data can quickly become a game changer for central bankers and bond yields in 2018.

The year has barely started and an “everything-is-awesome” sentiment dominates the outlook. The global financial crisis, the euro debt crisis and the commodity price shock are all now largely in the rear view mirror. However, the true test of global health will be how economies adjust to less central bank stimulus after nearly a decade of priming the pump in favor of asset prices. And, this year will also give analysts a good look at how much politics will run interference with the international movement of goods and people.

Below is a brief overview of each of TD Economics’ six global economic themes for 2018, or you can read the full report here.

2018 Global Economic Themes

Global Reflation. As one of the primary focuses among global central banks in 2017, the topic of low inflation popped up consistently throughout 2017. There are quite a few different ideas about what’s been causing low inflation rates, but with continued global economic growth, low unemployment rates in advanced economies and sustained wage growth (chart 1), most economists are anticipating an eventual uptick in inflation. TD Economics noted that “we may find that inflation-targeting central banks will be more inclined to run their economies a little hotter than necessary, rather than risk tightening financial conditions too fast and ending the expansion prematurely.”

Rising Global Interest Rates. After year of persistently low, and sometimes negative, interest rates across major economies, several of the major central banks around the world have started to hike interest rates (chart 2) and reduce their balance sheets that grew after they started buying large quantities of bonds and other assets to support markets in the wake of the financial crisis. TD Economics noted that “there is the general sense that a decade of low interest rates has instilled a sense of complacency in investors, evidenced by ultra-low volatility in global stock and bond markets despite elevated policy uncertainty and geopolitical risks (charts 3 and 4). It would not be unusual to see rising interest rates trigger bouts of financial market volatility in the coming months.”

Elevated Debt Levels. For the most part, households, companies and governments around the world have taken on more debt over the past decade. Out of the three, companies have a little more flexibility when it comes to funding options, whereas governments are typically limited to increasing taxes and/or cutting expenditures, and consumers might experience wage growth and/or reduce expenditures. Wealth recovery in U.S. households since 2004 has been concentrated among higher incomes (chart 5), which leaves many American households more sensitive to changes in interest rates and income, according to the report.

Productivity Growth Picking Up. “Strong economic growth over the last six quarters in G7 economies has partly reflected firming productivity gains,” according to the report (chart 6). Productivity growth can lead to an increase in economic output, which can impact policymakers decisions regarding interest rates. Unexpected changes in interest rates can have a broad effect on all asset classes including stocks, bonds and commodities.

Election Outcomes. There were quite a few knee-jerk responses in the markets stemming from political headlines in 2016 and 2017. With U.S. mid-term elections and general elections in parts of Europe in 2018, politics could once again be a dominant theme with bouts of volatility.

Brexit, NAFTA and Geopolitical Risks. Many of these events are merely a continuation of what was making the headlines in 2017. In 2018, the Brexit negotiation process between the UK and the EU continues, there’s uncertainty regarding the future of the North American Free Trade Agreement (NAFTA), global negotiations continue regarding the Trans Pacific Partnership (TPP) trade agreement and there are still geopolitical risks, particularly with the situation in North Korea.

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